help need for risk free investment

skid112

Good morning,
a friend of mines brother has a lump sum he wishes to invest but he is massively adverse to risk, on a 1-10 scale he is at least a 0 if not a minus. He has taken financial advice from what i would call, an unscrupulous chap, who has told him to buy a Skandia bond. Saying its an 8% return with no risk.
Any thoughts or suggestions greatly appreciated and before we go ISA route yes have told him of them so thats £6k for him and his wife taken care of.

dunstonh

Skandia's investment bond is not a good value product. Ed would crucify this product and I wouldnt be able to justify it in any way in response. I did a bond yesterday (and after elminating unsuitable provider versions that didnt meet criteria), the Skandia product came out ranked 34th. It was once one of the best bonds but lack of development over the years has seen other providers offer better and cheaper versions.

AFAIA, there is no guaranteed 8% option at this time with Skandia.

Cash is his only option (although if he is drawing the interest as income, then perhaps a word to him about inflation would be a good idea as cash carries risks then).

[Deleted User]

dunstonh wrote: »

Cash is his only option (although if he is drawing the interest as income, then perhaps a word to him about inflation would be a good idea as cash carries risks then).

Hi Dunstonh - This is the type of thing I don't quite understand.. there's plenty more, but let's stick to this one for now!!! If inflation is currently at 3% and investment income is typically around 5.5% - and if you only draw say 3% or less, ie less than inflation, than where is the problem with capital erosion? Or am I taking a naive look at this - which would not surprise me in the least!! Your comments in very simple terms please, would be much appreciated.

dunstonh

If inflation is currently at 3% and investment income is typically around 5.5% - and if you only draw say 3% or less, ie less than inflation, than where is the problem with capital erosion? Or am I taking a naive look at this - which would not surprise me in the least!! Your comments in very simple terms please, would be much appreciated.

RPI is currently 4.8%. So you need to be beating 4.8% after tax. (not 3%)

Someone looking for an income and drawing the interest will never see the value rise. £100k now would be worth £64,000 in 10 years time using 4.8%. Typically you would use 70% as an example over 10 years though.

Its not just the capital value that has lost money in real terms though. The income goes down in real terms as well. 5% of £100k now may be worth £5k a year now but in 10 years, it will have the spending power around £3500.

Inflation is the biggest risk to cash and as posted yesterday on another thread over 69% of no notice accounts pay less than the current rate of RPI. (moneyfacts April 07)

If you are not drawing the interest, then its not so bad but if you are drawing the income, you will suffer a lot.

nrsql

Could also look at the NS&I index linked bonds - currently 6.15% (RPI+1.35%) tax free.
But as has been said minimal risk is probably going to lose out in the long term but may be best depending on what period you are thinking about.

[Deleted User]

Thank you for your reply. I totally agree with what you're saying, so what is the answer? I don't know of any investments that will allow you to draw an income and still beat inflation, and yet, low risk enough to protect the original investment. But hey, if I knew that, I'd be a financial advisor. Just kidding!!! Surely your reasoning can be applied to any investment. That is, the real value of an investment, will be reduced over the years.

dunstonh

Risk is not an on/off situation. It is a sliding scale. To build a portfolio that has the potential to pay 5% net and beat inflation requires moving into at least cautious investments. It doesnt need to go into the deep end but a sensible level of risk taken offers the potential to achieve it. There is no guaranteed option though (in the case of income).

It also doesnt mean that 100% of the money goes in there. You create a pecking order with some cash and some investment.

The ideal product of maximum return, inflation proofing and no risk just doesnt exist. So you need to compromise somewhere.

If the income is to keep you going in retirement and the only guarantee you are worried about is in the event of your death you want to make sure a partner/spouse or beneficiaries get the money, then there are many options available which have guarantee minimum return of capital in the event of death.

[Deleted User]

dunstonh wrote: »

.

If the income is to keep you going in retirement and the only guarantee you are worried about is in the event of your death you want to make sure a partner/spouse or beneficiaries get the money, then there are many options available which have guarantee minimum return of capital in the event of death.

I think you are now saying what I been thinking all along - there is no guaranteed investment to beat inflation. The only thing one can do is to mitigate the inpact. You say there are many options available - such as what? Perhaps I should appoint an IFA, but finding one who can be trusted... well that's another mission into the unknown!!!

plonkee

If inflation is currently at 3% and investment income is typically around 5.5% - and if you only draw say 3% or less, ie less than inflation, than where is the problem with capital erosion?

If inflation is at 3% and investment income is typically around 5.5% after tax then you can withdraw 5.5-3 = 2.5% and the capital will be worth the same in real terms as will your income.

Unfortunately, if inflation is at 4.8% as dunstonh and investment income is at 5.5% before tax, then a basic rate tax payer can withdraw 5.5x0.8 - 4.8 = -0.4% to maintain the capital, or in other words, even if you withdraw nothing, you still lose money in real terms. And for a higher rate tax payer its even worse.

If the NS&I index linked bonds are at RPI + 1.35%, then you can use the 1.35% as income and the capital will be maintained in real terms.

Conrad

What about this;

Im risk averse btw.

Ive found a property built by the Malaysian Government which guarantees a minimum 8% yield and rising each year. There are no ongoing costs and the rentals will actually be run by the international hotel chain 'Swiss - Bel'.

Not only that but you own the property and the predicted capital growth is 20% pa.

Again I am a very very cautious investor and I know every trick there is when it comes to getting people to buy foriegn property. This is one of those few gems that really does meet my strict criteria.

Your freind might say 'ooo, no thats too far away', but this is not a rational notion. Its totally hassle free, handsoff investing.
The property is the worlds third PALM - like the one in Dubai built in the shape of a palm. It will be an iconic property to own and the cost is just £73000.

Im only putting in £22000, the rest is arranged with HSBC Malaysia - a non status guaranteed mortgage which the rent will cover.

One point though; Its not built until 2009 (great for me as I get capital growth from now on the full £73000 value as at today, yet only put in £22000 for now).

No CGT and limited income Tax (deducted at source).

People say "ah but you will pay the CGT in the UK". In reality no one I know does as they keep the funds offshore.

In my mind this is a lot less risky than packaged investments - none one person I know has done well out of packaged investment unless they are left for a very long time.

dunstonh

Im risk averse btw.

Ive found a property built by the Malaysian Government which guarantees a minimum 8% yield and rising each year. There are no ongoing costs and the rentals will actually be run by the international hotel chain 'Swiss - Bel'.

Sorry conrad but far east property is not for the risk averse. Certainly high potential and have an asian property fund in my portfolio but it isnt for the risk averse (even though yours is direct and mine indirect).